Thursday, August 04, 2011

The U.S. economy is bloated and inefficient; if we want to nurture enterprise and employment, we need to strip away what no longer works or is counter-productive.

The bottom line is that there is a fantasy view of America as a dynamic, innovative, efficient economy, and the stark reality that it is actually grossly inefficient, bloated, wasteful and not innovative in any meaningful structural way.Rather, the U.S. economy and culture have become calcified and rigid, fixated on counter-productive rationales and "projects" which yield no real return but which feed self-protective fiefdoms that stripmine the nation to feed their insatiable appetite for revenue and political power.

If we want to foster enterprise and employment, we have to face the reality that the U.S. economy is horribly inefficient and loaded with deadweight costs. Many seek external reasons for America's sagging economy, and issues of globalization, "free" trade and tariffs are certainly real. But we should keep in mind that imports and exports combined are roughly $3.2 trillion, or about 22% of the GDP.

We should also keep in mind that roughly half of "imports" are actually "related party trade" which the U.S. Census Bureau defines thusly: "Related-party trade includes trade by U.S. companies with their subsidiaries abroad as well as trade by U.S. subsidiaries of foreign companies with their parent companies."

In other words, half of the imports come from U.S. subsidiaries: they are not the result of "foreigners" but of U.S corporations shipping in goods within their global corporate structures to reap immense profits in America.

Globalization is all about reaping vast profits, which is why U.S. corporate profits are near all-time highs: almost 14% of the entire GDP.

So while we need to understand how trade and trade policies have impacted employment, we should start by recognizing the gross inefficiencies and high cost structure of the domestic U.S. economy. No amount of fiddling with trade and tariffs can overcome the domestic bloat and counter-productive "projects" of fiefdoms and cartels.

2. Cut healthcare/sickcare in half to align it with the costs of our developed-world competitors

3. Make starting small business and expanding small business easier by centralizing and speeding up permitting, regulation and oversight functions of overlapping government fiefdoms

Here are more essential steps which must be taken to lower the cost structure and eliminate counter-productive systemic bloat. Covering each topic would take an entire volume, but in shorthand:

1. Rationalize the tax structure to incentivize productivity and labor and disincentivize speculation and arbitraging of global wage and environmental imbalances.

2. Reduce unproductive waste of energy, and lower the cost structure of energy production in the U.S.

3. Eliminate the "war on drugs" and the drug-prison gulag, and transform drug abuse from a law-enforcement issue to a medical-care issue.

4. Reorient the Federal government's vast expenditures on basic research to creating enterprises and jobs.

5. Revolutionize education from the "factory" model to the "workshop" community model.

6. Reorient "free" trade away from ideological excesses of purity and from policies which benefit corporate profits at the expense of employment opportunities.

Before you fire off a hot email defending the wonderfulness of "free" trade (there is no "free" trade, there are only trade policies with implicit incentives), please read Globalization and UnemploymentThe impact of globalization on income and employment by Nobel laureate Michael Spence.

Spence does not paint globalization with either a black or white brush--he notes that trade policies are chosen to benefit either employment and labor (as in Germany) or corporate profits, as in America.

Since corporations "own" the machinery of Federal governance, there is no mystery in the policy choice of the U.S. government. Spence's point is that we could choose a different policy and still maintain "free" trade: he argues that trade could benefit employment and labor, and reduce the widening income disparity in the U.S. (The top earners here reap eight times the salary of lower-paid workers, while the ratio is 4-to-1 in Germany. This is the result of national goals and policies, not some "invisible hand.")

As correspondent Arthur B. recently observed in an email, "Tariffs are legal within the WTO (World Trade Organization). The United States has chosen to have zero tariffs on most items from most countries, but we do have a 10% tariff on Pharmaceuticals. Our average tariff on goods imported from China is 2.5%, while China's average tariff on U.S. goods is 25%."

I can verify via our Chinese friends that many U.S. goods are much cheaper in the U.S. than in China due to high tariffs and other mechanisms that make imported goods costly.

Some friends from Denmark recently rented a Cadillac on their vacation here, and they told us this $60,000 car costs over $100,000 in Denmark due to tariffs and fees.

Both Denmark and China are members of the WTO, and both promote their version of "free" trade. "Free" trade is an ideological construct; it does not exist in the real world. Trade is an expression of policy, be it benign neglect, maximizing corporate profits or fostering local industry; there is nothing "free" about it.

Slapping 100% tariffs on everything from abroad is not going to solve America's deep structural problems. However, we would profit from understanding Spence's article and resetting our goals to align with those of our competitors such as Germany which have goals of maintaining employment.

Spence also noted the critical role of research and development (R&D) if it is reoriented to foster enterprise and employment. Correspondent John W. made the same point:

Yes, small business is where the jobs are created but there has to be a reason to create them. This is where the role of government comes in. Traditionally, of necessity, government funds basic research and creates markets by seeding them and putting the appropriate regulatory and legal frameworks in place. Almost every new industry with the possible exception of chemicals that started in Germany and maybe one or two others was brought into being by government. In short, businesses exploit markets. Businesses do not create them. This makes sense for doing basic research and creating markets are not profitable adventures with risks that are way too high for any business to assume willingly.

For example, I have personal experience with the support government provided to get the integrated circuit industry going. Back in the 1960's, ARPA was charged with funding promising new technologies. At that time, our leaders know it was easy to get funding for "defense" so they used ARPA as the vehicle for basic research and market creation for society as a whole not just for defense. Ironically, ARPA is now DARPA showing its change in focus to defense rather than society. Of course, we also believed in basic research then and funded universities according. All of that was in the era before industry and finance took over the universities and bastardized their output.

Thank you, John, for clarifying the role of R&D. Clearly, R&D could be realigned to focus specifically on creating employment opportunities. This would have to go hand in hand with a revolution in education, shifting it from the fiefdom-factory model to the "workshop" community model. I have written extensively about education, and without belaboring the obvious: the present "factory" model system is completely broken and connot be "reformed."

The only way to "educate" people to prepare them for real life and a changing era and economy is to do so on a community level, involving the entire community. Setting up a huge "factory" run by fiefdoms has failed and will always fail.

The "classroom" as traditionally designed has also failed.

I could easily write an entire book about this, but you get the basic idea: we have to scrap the entire system as broken and counter-productive, and set up an entirely new way of understanding education, socialization, learning, skills, and the need for full community engagement in education. Diddling around with the parameters-- gaming test scores, lowering class size from 31 to 27, etc--will accomplish nothing. We need a revolution, from the ground up, if we want to foster enterprise and employment in the era of "the end of work."

The "war on drugs" is a complete failure, and acts as a "useless tax" on productive citizens. Here is the fallacy of the "war on drugs" in a nutshell: the base assumption of the "war on drugs" is that the availability of drugs alone will increase their use to epidemic levels and ensnare otherwise healthy citizens in a downward spiral of addiction.

Clearly, the "war on drugs" has failed to limit availability; rather, by increasing the profitability of drugs, it has created a tidal wave of availability. But the real issue here is that the model of availability being the source problem is simply wrong.

Here's the reality: healthy people with positive goals, caring families and productive lives have little interest in getting drunk, wasted or addicted. Availability has little to do with "demand" for getting drunk, wasted or addicted. People who are in internal pain/distress, who feel useless and who lack goals and productive lives seek out drugs, and low availability does not hinder them; they either get what they seek legally (i.e. get drunk) or quasi-legally, i.e. OxyContin, a synthetic heroin which is legal, restricted yet widely available despite the "war on drugs," and which is laying waste to thousands of people via its addictive properties.

The one and only solution is to end the "war on drugs" and face the reality that drugs are a medical/healthcare issue, not an availability/law enforcement issue.Trying to restrict availability via law enforcement has been a perverse disaster, creating drug cartels and a costly prison-gulag complex that acts as a hidden tax on the society and economy.

Make all drugs (other than "ice") legal, controlled and cheap, and you will wipe out the drug cartels overnight, and free resources squandered on the gulag/prosecution/law enforcement fiefdoms. The reason people get addicted is not because it's available--it's always available. They get addicted because they're in some sort of internal pain and they're troubled.

I come from a family with severe alcoholism, so please spare me the stories about perfectly healthy, untroubled people who puff a spliff and soon end up in the gutter with smack tracks on their arms. Of all the hundreds of people I have met and known in 57 years, I have never met one psychological healthy (that is, with basic self-esteem, positive attitude, emotional well-being/"intelligence", positive goals, caring family and friends and tools of self-management) who found drug abuse appealing.

What we are in denial about is not drugs, but the sickness of our society and culture which fosters drug abuse. The only way we can face up to this is to understand drug abuse as a healthcare/mental-health issue, not as an issue "solvable" by law-enforcement, the courts and the drug-gulag.

Disagree if you want, but please do not rely on prepackaged ideology for "answers." What no one can possibly deny is that 40 years of attempting to restrict availability has failed, completely, utterly, totally. Even if you truly think that is the "answer," the policy has failed. The "demand" is not "insatiable" from healthy people, it's from people who are troubled and prone to addiction as an "answer." Reducing "supply" has simply driven people to "legal" OxyContin. If that's your idea of "success," then what precisely would constitute failure?

Lastly, we have to face the reality that as local government resources are thinned by declining tax revenues, law enforcement resources available for the "war on drugs" will dwindle. Laws will not be enforced uniformly, and so a state of lawlessness will be "normalized." Is that a solution any rational person would choose over junking the entire "war on drugs" model and reframing it as what it really is, a healthcare/social issue?

The U.S. squanders a monumental amount of energy. yet despite this obvious reality, all the hubbub is about getting "more energy." The easiest way to generate "more energy" is to radically improve efficiency and cut waste. This mindset runs counter to the standard American ideology of "no limits, only more," which is a strong headwind to a rational understanding of energy consumption.

Here is a very useful presentation about energy consumption and generation: The Game Plan. While the author invokes climate change, this is not the core of his presentation; the issue he discusses in fascinating detail is personal consumption patterns and global production of energy.

The first is the impersonal story told in very big numbers about climate change, global energy consumption, and fossil fuels.

The second is the personal story about how every decision you make in your life impacts everyone you share the planet with, and just how big the scale of the energy challenge is.

I highly recommend reading the entire presentation.

As for taxes: the current complex tangle acts as a hidden tax with virtually no yield or benefit. Choose whatever tax scheme you want, but it should fit on one piece of paper. Anything 1,000 pages long is not a "solution," it's the problem.

People are aware of the unfairness of the current tax system, and the goal should be to restore fairness and faith in the fairness of the tax structure. Vast disparities in tax rates and enforcement breed contempt for taxation in general, and are rapidly delegitimizing fundamental institutions. People want accountability on how their taxes are spent but also on how they're imposed on the economy.

Those who own the machinery of governance will buy exemptions and loopholes; until the nation imposes some limits on concentrations of wealth and the political power it buys, then that won't change.

ABOUT THAT "SUSPENDED SERVICE" NOTICE: The site was transferred to a dedicated server yesterday, and there was a brief interruption of service as a result. Thank you to everyone who emailed to notify me of the outage. I maintain a mirror site on Blogspot, which you can always book mark charleshughsmith.blogspot.com or access via my RSS feed. (Note: the Internet is not "free" by any stretch of the imagination. A dedicated server cost thousands of dollars a year.)

NOTE OF THANKS: Thank you to everyone who wrote positive, encouraging emails recently--I have read and savored every one. Due to the press of events and workload, I am unable to respond at this time. To those I owe books to: please be patient, I hope to have worked through my backlog by next week.

Thank you to everyone who emailed me in the past week; while I read every email, at this point correspondence is like the incoming tide and my little sandcastle of time and energy has been completely swept away. Thank you for your understanding that I am just one standard-issue individual with extremely limited time to spend on the site.

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